2010 - spc book - full text - future of welfare state

8/8/2019 2010 - SPC Book - FULL TEXT - Future of Welfare State

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The Future of theWelfare State

Social Justice Ireland


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he Future of theWelfare State

Edited by

Brigid Reynolds, s.m.

Sen Healy, s.m.a.Michel Collins

Social Justice Ireland


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I.S.B.N. No: 978 1 907501 03 6First Published: September 2010

Published by:

Social Justice IrelandArena HouseArena Road

SandyfordDublin 18Ireland

el: 01-213 0724e-mail: [email protected]:www.socialjustice.ie

Sponsored byAIB Investment ManagersAIB Investment House,

Percy Place,Dublin 4.el: (01) 661 7077Fax: (01) 661 7038

Social Justice IrelandWorking to build a just society


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TABLE OF CONTENTS

Introduction v

1 The future of the welfare state: An overview 1ony Fahey

2. The welfare state across selected OECD countries: 20How much does it really cost and how good is it in

reducing poverty?

Willem Adema

3. Shaping public policy: Is there a place for values-led 51debate and discourse in the public sphere?Daniel OConnell

4. Shaping the future of the welfare state 95What are the challenges and how might

they be addressed?Sen Healy and Brigid Reynolds


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CONTRIBUTORS

Willem Adema is Chief Economist at the Social Policy Division,OECD (Organisation for Economic Cooperation andDevelopment) Paris.

Tony Faheyis Professor of Social Policy and Head of School atthe School of Applied Social Science, University College Dublin

Sen Healyis Director, Social Justice Ireland

Daniel OConnell is with the Department of Learning, Societyand Religious Education in Mary Immaculate College, Universityof Limerick.

Brigid Reynolds is Director, Social Justice Ireland


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INTRODUCTION

he welfare state is not an end in itself. It is a means to an end the well-being of all people. he future of the welfare state has been a topic ofdiscussion and argument for more than 30 years on issues ranging fromeducation to employment, from healthcare to social housing, from welfarerates to pensions to provision for people with disability. Some haveclaimed it cannot survive because the population is aging. Others haveargued that globalisation will undermine it in due course. Recenteconomic upheavals and huge budget cutbacks in many countries have

added to the questions faced by the welfare state.

Is the welfare state really under threat? Has the era of the welfare statepassed? Will people continue to support it? What are the major challengesfaced by the welfare state at this time? What impact does the welfare statehave on reducing poverty? Can the necessary funding be provided? If thewelfare state is to survive how should it adjust to the changing economicsituation? What are the implications of demographic developments? What

should be the core of the welfare state if it is to persist in the twenty firstcentury? Can the nation state continue to be the basis for this kind ofdevelopment model, this kind of social contract?

In these economically turbulent times it is essential to focus on the shapeof the society we wish to see emerge. he welfare state has been inexistence in Ireland for about a century. Do we wish to see it continue? Ifso, what form should it take? What are the key challenges it faces in

Ireland? How might these be addressed effectively and efficiently? Shouldpeoples expectations of the welfare state change?

he chapters in this book, which were first presented at a policyconference on the topic ofThe Future of the Welfare State, seek to addresssome of the key questions and issues that emerge in this context.

his publication is the 22ndvolume in this series organised and publishedby Social Justice Ireland(previously published by CORI Justice) whichhas sought to address these questions and issues on a day to day basis.

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ony Faheys opening chapter provides an overview of the welfare state

and addresses some key questions concerning its future. Willem Adema

analyses the welfare state across selected OECD countries including

Ireland, asks how much it really costs and how good it is in reducingpoverty. Daniel OConnell asks if there is a place for values-led debate

and discourse in the public sphere in the shaping of public policy and

proposes a core set of guidelines that should underpin such debate. Sen

Healy and Brigid Reynolds focus on the purpose of the welfare state, the

challenges it faces and what the core elements of a welfare state for the

21st century should be. hey also address the key issues of financing and

of responsibility.

Social Justice Irelandis concerned with issues of principles, paradigms

and guiding values as well as with the specifics of problems and policies.

It approaches all of these from a social justice perspective.

Social Justice Irelandis a recognised social partner within the Community

and Voluntary pillar of social partners. In presenting this volume we do not

attempt to cover all the questions that arise around this topic. his volume

is offered as a contribution to the ongoing public debate around these andrelated issues.

Social Justice Irelandexpresses its deep gratitude to the authors of the

various chapters that follow. hey contributed long hours and their

obvious talent to preparing these chapters.

A special word of thanks also to the AIB Investment Managers whose

financial assistance made this publication possible.

Brigid Reynolds

Sen Healy

Michel Collins

September 21, 2010

vi The Future of the Welfare State


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1.The future of the welfare state: An overview

Tony Fahey

Introduction

he welfare state has been in existence for about a century in Ireland. he

introduction of old age pensions in 1908 and unemployment insurance in1911 marked its birth (McCashin 2004: 3-27). Some state funded services

long pre-dated this period the National school system, for example, was

founded in 1831. On a broad definition, therefore, the origin of state

supports for the welfare of the population goes well back into the

nineteenth century. However, it is common to think of provisions for

maintaining peoples incomes in times of need, conceived of as a matter

of right rather than of charity, as at the heart of the welfare state. On that

basis the first decade of the twentieth century witnessed sufficiently radicalshifts in the direction of modern welfare provision for it to be counted as

a founding period. Developments in this era were not peculiar to Ireland:

the initiatives of 1908 and 1911 came from the UK government rather

than from within Ireland and reflected the growing strength of the labour

movement in Britain. hey were in keeping with the widespread

movement in leading western countries at that time to expand the states

welfare role: Germany led the way in the 1880s with the worlds first

system of state-backed social insurance for sickness, accidents, old ageand invalidity, while the United States did not get on the same track until

Roosevelts New Deal of the 1930s (Flora and Alber 1981). he welfare

state could thus be said to be entering its second century, as long as we take

that to refer to something like its average duration across the western

world as a whole rather than its exact duration in every country.

As the welfare state reaches this stage, the question we are concerned with

here is what its future will be. I will address this question as it applies to

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the welfare state in general rather than in Ireland as it is worth trying to

focus on the overall thrust of likely developments rather than dwell on the

undoubtedly important issue of national variations. aking a big-picture

approach, then, we can ask if the best days of the welfare state are behindit, or if it has become a too firmly rooted part of modern societies for it to

be easily dislodged. Will it take the same form in the future as we have

become accustomed to in the past?

he present paper provides a three-fold answer to these questions:

first, that the welfare state has become so well established and so tied

into the fabric of modern life that it is extremely difficult to cut back the welfare state is unlikely to be muchsmallerin the foreseeable future

than it is today;

second, the progressivity of the welfare state (its effectiveness in

providing protection to the vulnerable rather than favour the well off)

is less secure than its size: there are real risks that ever-present

tendencies for the poor and marginalised to come second in welfare

distribution will gain the upper hand;

third, the very notion of what progressivity means is coming undernew scrutiny in the light of cross-national inequalities and various

movements towards cross-national integration, of which the European

Union is a leading example. he issue here is whether the nation-state

as the frame of reference for defining and understanding public welfare

provision will continue to be as dominant and unquestioned in the

coming century as it has been in the century just gone and what that

means for what we would define as the ideal welfare state of the future.

Underlying these answers is a more general theme of the cross-cutting

nature of forces affecting the welfare state and the consequent difficulty of

detecting a single clear underlying direction of movement. So many things

are happening at once that it is difficult to list and grasp them all, much less

add them together and come up with a forecast of where the resulting

balance of forces will lie.

he future of the welfare state: An overview

2 The Future of the Welfare State


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Crisis and retrenchment?

he question of how big the welfare state should be has often been

discussed over the past century. Supporters of the welfare state have oftenworried that it might be about to shrink, while opponents have often

sought to bring that outcome about. As we in Ireland, like other peoplesin the world, try to come to terms with the recession and financialupheaval of the past two years, talk of welfare cuts is in the air and the

future of welfare provision seems particularly threatened at the presenttime. In dealing with this issue, we have to distinguish between short-termchanges during recessions which are more-or-less automatic responses

arising from the current structure of welfare provision (such as theincrease in welfare payments for the unemployed as their numbers soar)and longer term structural changes which might alter the underlyingnature or role of the welfare state. In the short-term, the recession has

caused social expenditure to balloon in Ireland, as it has in many othercountries, both in absolute terms and as a share of a national income.However, this tells us little about long-term prospects since the future

direction of welfare provision will be the outcome of longer-term forces.

It is the latter we will be concerned with here, and for guidance on thisquestion, it is useful as a first step to look at past experience and see whatthat can tell us about where we are headed. Over the past century, there

have been two episodes of crisis of a type and on a scale of what we arenow experiencing the depression of the 1930s and the long recessionwhich followed the oil-price shock of 1973. What do they tell us about

how the present crisis might affect the welfare state?

The 1930s depressionhe value in referring briefly to the depression of the 1930s in this contextis the reminder it gives us of the role of welfare spending as part of the

solution to recession and of how widely that role was adopted and put intopractice in the 1930s, even before Keynesian theories of macro-economic

management provided a new orthodoxy on that question. Roughlyspeaking, in the first half of the 1930s the still-young and small systems ofstate welfare provision of that period come under severe pressure, often

to the point of collapse. Economic contraction, soaring unemployment

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and falling revenues in effect bankrupted services like Britains system of

unemployment insurance and led to economic chaos in Germany.

However, there were other countries where social insurance principles

continued to expand, and in many cases did so because of rather than inspite of the social and economic pressures created by the difficult

economic problems of the time. he state stepped in to strengthen the

fiscal base of social insurance in Britain as its original revenues from

insurance contribution bases dried up. In the United States, the Social

Security Act of 1935 in effect created the American welfare state (such as

it ever was) and was a central component of Roosevelts New Deal. In New

Zealand, the Social Security Act of 1938 was hailed at the time as setting

a new benchmark for social insurance provision (Lindert 1984).

At the same time, Keynes was building an intellectual case for the welfare

state which presented it not as an altruistic support for the poor but as

part of a package of policy instruments which states could use to keep the

market economy on track and prevent recurrences of economic collapse.

Welfare spending in his model served not only to protect the economically

vulnerable but also to stimulate economic demand at times when private

expenditure by firms and households dried up and locked economies intodownward spirals of falling output and falling demand. In trying to

account for the burgeoning of the welfare state after the Second World

War, it is difficult to separate out the effects of the war itself from the

groundwork that had been laid in the 1930s, but there is no doubt that

the experience of depression and the failures of free-market capitalism in

that period contributed to the groundswell of support among both

political elites and the general public for state social provision that built up

during the war. It is instructive in this context to recall that the BeveridgeReport, which drew up the blueprint for the post-war welfare state in

Britain and was an inspiration for similar efforts around the world, was

initiated in 1941 and published in 1942 (Hills, Ditch and Glennerster

1994). he giant evils of squalor, ignorance, want, idleness and disease

it sought to combat were of the 1930s and earlier decades rather than of

the war itself. Beveridge had been involved in the design of social policy

in Britain since 1908 and his thinking in the early 1940s on Britains welfare

state had thus been maturing for over three decades. Beveridge also




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emphasised the benefits of welfare provision for the competitiveness of

the British economy and as a necessary element of general economic

reconstruction.

In general, therefore, it is reasonable to say that the economic crisis of the

1930s was a major spur to the flowering of the welfare state which

occurred after the war. It is well to keep in mind this generally pro-welfare

outcome of the 1930s depression as we think of the possible consequences

of the present financial crisis for the future of the welfare state.

The 1970s recession and the new right

Although the post-1973 recession was less severe than the depression ofthe 1930s, its portents for the welfare state seemed to have all of the

negatives and none of the potential for a stronger public role that were

present in the earlier crisis. By the early 1970s, the western world in general,

and most western European countries especially, had experienced thirty

glorious years of the post-war welfare state. This was the period when

there seemed to be no contradiction between strong economic growth and

rapid extension of social provision, since both had expanded at an

unprecedented rate since the 1950s (Lindert 1984). However, the economicshocks of the 1970s the collapse of the Bretton Woods agreement in 1971

and the oil crisis of 1973 brought this period to an end and gave rise to

a new era of slow growth, high unemployment and industrial unrest. Most

puzzlingly for champions of the then standard model of welfare capitalism,

the period was marked by a combination of stagnation and inflation

(stagflation) which could not be accounted for by Keynesian economics

and which challenged the intellectual consensus that had underpinned the

state-market mix of welfare capitalism. The way was opened for thealternative monetarist doctrine of Milton Friedman and the Chicago

school of economics to build a following. This doctrine highlighted control

of the money supply rather demand management by government as the

key instrument of macro-economic guidance. It advocated a minimal role

for state intervention outside the field of monetary policy.

he election victories of Margaret hatcher in Britain in 1979 and of

Ronald Reagan in the United States in 1980 seemed to signal a triumph for

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this new approach. Both were swept into power on the back of attacks on

high taxation and generous social provision, which they blamed as the

causes of slow growth and high unemployment. heir pledge to roll back

the state in favour of a stronger role for the free market seemed to heralda new era of retrenchment in social spending, while the historic

champions of the welfare state, the trade unions and left-wing parties,

were on the wane. It appeared that, in some ways, this period was the

reverse of what had emerged in the 1930s and 1940s. Welfare provision in

the 1970s and 1980s was not a new arrival on the scene which could be

presented as offering a solution to the ills of the day. Intellectual radicalism

came from the new right rather than the left, and the giant evils portrayed

by the new right as obstacles to progress had to do with indolence andlack of enterprise caused by the nanny state rather the old problems of

destitution and diseases caused by the heartlessness of the market.

Against that background, the surprise of the period which followed is how

resilient the system of social provision proved to be. Far from succeeding

in cutting back on social spending, both Reagan and hatcher either held

it steady or allowed it to expand somewhat (see esp. Pierson 1994).

Looking over the whole of the OECD and over the longer period from1980 to 2005, the overall pattern was for social spending to continue to

grow. In the UK, for example, gross social expenditure rose from 16.7 per

cent of GDP in 1980 to 21.3 per cent in 2005. In the USA, the

corresponding increase was from 13.1 per cent in 1980 to 15.9 per cent in

2005, while taking 24 OECD states together, the increase was from 16 per

cent to 20.6 per cent (Adema and Ladaique 2009: 22-24; see also Obinger

and Wagschal 2010: 336-7).

here has been a great deal of scholarly debate on how complete and

accurate this picture of continued expansion is. he range, diversity and

complexity of state social programmes are so great that it is difficult to

summarise trends in individual components, much less add them all

together to get an overall picture. In the case of social expenditure, for

example, programmes come and go over time, the boundaries around

what to include and exclude as relevant expenditure are often difficult to

define, and tax-related factors such as tax claw-backs on gross




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expenditures and tax-breaks for private pensions and health insurance

mean that actual net social expenditure can be very different from what

gross expenditure data suggest (on these complexities, see Adema and

Ladaique 2009). Some fields such as supports for housing are socomplex to compute on a comparable basis across time and place that

they are usually omitted from comparative data on welfare states (Fahey

and Norris 2010). hus even the more comprehensive attempts to

measure the scale of the welfare state often have to overlook certain

components.

hese complexities have enabled some scholars to offer different

interpretations of the durability of social provision over recent decadesand to argue that in fact there has been more retrenchment than meets

the eye (Levy 2010: 558-61). Some individual instances of harsh cutback

did occur (e.g. New Zealand in the mother of all budgets in 1991); there

were many shorter periods of regress that are lost sight of if long time

comparisons are made, and in many cases apparent expansion concealed

reductions in levels of benefit since rising unemployment, population

ageing and changing family structures caused need to outstrip growth in

provision (Korpi and Palme 2003, Starke 2008). Others have argued thatto interpret developments along a single axis of expansion and contraction

is too narrow since many important changes in welfare provision have

had to do with redesign and recalibration of programmes rather than

simple growth or decline. his is the case, for example, in regard to the

interest in activation which was added to programmes for the

unemployed in the 1990s as governments sought to shift the emphasis of

unemployment supports from income maintenance to training and

incentives to return to work (Eichhorst and Memerijck 2010: 220-9).

Nevertheless, in spite of these qualifications, the picture of trends in the

level of social provision in the aftermath of recession in the 1970s and

growth of the new right in the 1980s is of resilience and durability rather

than radical cutback. he extent of the welfare state may have differed

between countries, it may have fluctuated somewhat over short periods

and individual programmes may be subject either to contraction or

expansion. But it proved surprisingly resistant to overall sustained

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reduction, even at the hands of political leaders who seemed to havesecured a popular mandate for just that. hus, the welfare state that took

root and flourished in the first thirty years after the Second World War

was often assaulted in the second thirty years that followed and wassometimes clipped back here and there, but it has just as often thrown out

new shoots and nowhere has returned to the minimal levels of provisionof its earliest years.

Why resilience?

In the light of this apparent resilience of the welfare state since the 1980s,researchers have tried to understand what protected it and made itseemingly immune to large reduction (Levy 2010). Many of the forces thatcaused it to grow in the early years (such as strong labour movements and

the success of political parties with left-wing leanings) went into declineand new threats emerged from a resurgent new right, yet large-scale socialprovision persisted. Why was that so?

Part of the answer lies in basic changes in economic and demographictrends. As the era of full or nearly full employment came to an end in the1970s, the resulting rise in unemployment put upward pressure on welfare

spending. For many European countries in particular, high unemploymentseemed to become a fixed part of the landscape in the 1980s and 1990s(Eichhorst and Hemericjk 2009). Population ageing also began to have an

impact, as pension costs started out on a long rising trend that has not yetreached a plateau.

In addition to these underlying socio-demographic movements, a rangeof political factors served to protect the welfare state. he pioneeringanalysis of this issue by Pierson (1994) traced these factors to the politicalmobilisation of new interest groups that had grown up around the welfare

state as it developed into a major feature of the institutional landscape.Some of these interests centred on the recipients of welfare benefits, ofwhich the elderly in receipt of old age pensions were a particularly large

and powerful example. However, it was not just the elderly: the growth




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of the welfare state in previous decades had meant that, taking all

elements of social provision together, the share of the population that

gained no benefit from it was small. Even voters who might be

sympathetic to the general idea of a roll-back of the state were likely toresist it very strongly when it came to those aspects of public provision

which benefited themselves.

Another large block of interests sympathetic to social provision formed

on the provider side of the system, particularly in regard to services in

fields such as education and health. An important role was played here

by trade unions not so much as advocates of the interests of the working

class in general but rather as protectors of jobs and working conditionsfor their own members in the public sector. rade unions in general had

gone into decline in western countries outside the Nordic regions since

the 1970s, particularly in the new and expanding private services sectors

of the economy, but rates of unionisation remained high in the public

sector in most countries (Visser 2006). Public sector unions provided a

powerful source of resistance to wage and job cuts in state social services

and thus acted as a bulwark against reductions in spending in these areas

of the welfare state.

In addition to the factors which acted directly in support of public social

provision was the growing public doubt about the effectiveness of market

alternatives (Glennerster 2010). Private pensions provide an important

example since it was in the field of pensions that the Chicago school of

economics had made a particularly strong case for the virtues of market-

based over public provision. It also had its greatest real-life impact in the

form of the wholly market-based pension system which was introduced inChile in 1981 and was held up at the time as a model which other

countries should follow.

However, over the past three decades private pension systems have run up

against problems of coverage, cost and reliability that have raised as many

question marks over their effectiveness as have been raised over any area

of public sector provision, and these questions reached a new level during

the recent financial crisis. A fundamental issue is their inability to make

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provision for the poor the private pensions system in Chile neverreached more than two-thirds of the population and in recent years has

had to be supplemented by a public system directed at low-income

households. Annual fees charged by the private pensions industry rangefrom 0.5 to 2.0 per cent of fund assets and thus depress the real rate of

return and the more market competition there is, the higher the level offees since contributors are more swayed by promotion and sales effortthan by fees (apia and Yermo 2007). In addition, those relying on privatepensions have had recent dramatic lessons in how unreliable they can be:

before the recent financial crisis, the median funding level for 2,100 privatepensions funds across 15 OECD countries was 13 per cent in deficit; by

2009, as a result of the crisis, that median deficit had increased to 26 percent (OECD 2010: 9).

Protecting the vulnerable

he more inclusive and precise measurement of social expenditures that

is now possible on the basis of the OECD data has shown that there is less

difference in the size of welfare states across the OECD than hadpreviously been thought: the strong role of private social expenditures andrelated tax breaks in some countries means that their welfare states are

bigger than they seem, while the taxation levied on social welfare incomesin the more generous welfare states means that they are smaller than theyseem (Adema and Ladaique 2009). A comparison between Denmark and

the United States provides a good illustration (the following is based onable 5.5 in Adema and Ladaique 2009). Using a traditional measure

(gross social expenditure as a percentage of GDP), the Danish welfare stateis 87 per cent larger than that of the United States. However, if we takeaccount of the quite high taxes levied on welfare payments in Denmarkand the generous tax breaks for pensions and health insurance allowed inthe United States, the differential narrows a great deal the Danish

welfare state reduces to a 29 per cent size advantage over the UnitedStates. If in addition, account is taken of voluntary private expenditures onsocial services, which is very high in the United States and low in

Denmark, the differential disappears altogether total social expenditure




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according to the broadest measure used in OECD data is marginally

higher in the United States than in Denmark.

However, to say that some welfare states are bigger than we had thoughtand others are smaller is not necessarily to say that they are also similar in

how progressive they are. Precise measurement of the progressivity of a

package of social programmes is impossible to achieve (Esping-Andersen

and Myles, 2010), but nevertheless there are useful summary measures

that go a long way towards capturing their overall distributive impact. A

particularly important one is the poverty rate, which provides a metric for

the effectiveness of the welfare state in achieving what some would regard

as the most important of its core goals, namely, the protection of theeconomically vulnerable from basic inadequacies in living standards.

According to this measure, states in the developed world continue to be

quite different from each other and to differ very much along the lines of

traditional measures of welfare effort. his pattern is shown in Figure 1,

which plots poverty rates in OECD countries against a core traditional

element of welfare spending, namely, gross expenditure on cash transfers

for the working-age population (the focus here on the working-age

population serves to keep to one side the impact of pensions systemswhere distributive effects often have a distinctive character). As this graph

shows, levels of poverty vary widely and are closely related to the measure

of welfare spending used. o take the Denmark-United States comparison

mentioned earlier as an example, the poverty rate in the United States is

roughly three times higher than in Denmark, while cash transfers to the

working age population as a percentage of GDP are about four times

higher in Denmark than in the United States.

rends in poverty rates over time also enable us to assess the impact of the

rise in social expenditures since the 1980s noted earlier. Here again there

are problems of consistency and comparability in the available data, but

insofar as a picture can be constructed, it suggests that poverty rates in

OECD countries over the period 1985-2000 either remained stable or rose

slightly, with very few instances of significant decline (Nolan and Marx

2009: 322). he dominance of stability and increase in poverty levels in

most countries over this period could be interpreted to mean that the rise

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in social expenditures over the same period did not produce the kind of

anti-poverty results that might have been expected of them. Such an

interpretation would be consistent with the scepticism about the real

significance of those increases among some critics, as outlined above themore retrenchment that meets the eye view. However, an alternative view

is that inequalities in market incomes widened considerably in this period

in most countries but disposable household incomes did not, or did so

less consistently (Brandolini and Smeeding 2009). his would suggest that

the equalising job to be done by public social expenditures increased over

this period and that it represented a considerable success on the part of

welfare states that there wasnt a considerably larger deterioration in

poverty rates than actually occurred.

Figure 1. Cash benefits for working age population as % of GDP and poverty

rates (


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Progressive versus regressive programmes

In looking to the future of the welfare state in the light of these patterns,

there is a strong case for arguing that we should be less concerned aboutoverall size than about distributive impact. hat in turn would require us

to treat social expenditures not as a uniformly good thing but as a mix ofprogressive, regressive and neutral elements which could develop indifferent directions in the future. In looking at the resilience of the welfare

state and its apparent immunity to radical cutback outlined earlier, then,we would have to ask where the greatest resilience lay across these typesof elements and what factors were more supportive of the progressive as

opposed to the regressive or neutral elements.

Such an exercise is beyond the scope of this paper, but a few points can bemade. he first is that certain elements of public social expenditure

broadly defined are inherently either regressive or neutral they areincapable of being progressive. his is most true of tax breaks for a socialpurpose, which are of benefit only to those earning taxable income and

usually the more taxable income they earn, the greater the benefit they

can derive from these measures. he prominence of measures of this kindin the United States, along with the private social expenditures theystimulate, is the main reason why the US system of social expenditure

seems bigger on a comprehensive measurement than it appears instandard measurement but also the main reason why the positivedistributive impact of American social expenditure remains relatively

small no matter what measurement is used. In that context, the pressureto restructure taxation in the light of the sudden deterioration in the fiscal

situation in most countries as a result of the financial crisis is an importantturning point. It offers the opportunity for champions of welfaredistribution to highlight regressive tax expenditures as a particular area forreform and as an area where hard-pressed finance ministries could seekto raise additional revenue.

A second and related point that can be made is that the stance of thepublic system towards private social expenditures also has important

effects on the types of resilience that is present in welfare states. Broadly

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speaking, a public-private mix of the American type is more effective inharnessing private sector interests to the defence of social expenditures

but not necessarily in a benign way from a social distribution point of

view. Such interests, acting on the provider side of the private socialservices in fields such as private health care, private pensions and owner-

occupied housing, typically strive to maintain public subsidisation of thoseservices through the tax system and resist attempts to reform suchsubsidies in a more progressive direction. his is one area, therefore,where resilience in the current structures of the welfare state is not

necessarily a good thing. However, it is also an area where the appeal ofmarket solutions has been dented by the financial crisis and where the

ground for a stronger public role in welfare distribution is more fertilethan it has been for many decades.

A final point we can make about prospects for greater progressivity in

welfare distribution is the vigilance that needs to be exerted over socialprovision that is more wholly contained within the public system. heproblem here is that public provision can be and often is regressive. Agood example is provided by pension systems in some parts of Europe,

particularly in the Mediterranean countries. Here, public pensions havetended to be constructed on an insider-outsider basis in such a way thatthose in secure long-term employment (quite often in the public sector)

enjoy generous pension benefits, while those in the secondary labourmarket have weaker entitlements.

Welfare States and Nation States

I will turn now briefly to my final and most uncertain theme the futureof the nation state as the platform for the welfare state. wentieth centurysystems of welfare distribution, as is well recognised, had their economicfoundation in the free market and we constantly debate how welfare

institutions and market institutions should interact. Less attention is paidto the political dimension of the welfare state in the nation state or to thequestion of how welfare institutions should relate to the polities which

underpin them. Lack of interest in this topic arises largely because the




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nation state has become such a taken-for-granted element of the global

and especially the European landscape. he welfare state in its earliest

forms was created by European imperial powers, principally Germany

and Britain. But its maturation and full development came about with theend of empire and the emergence of the relatively small and ethnically

homogenous nation state as the standard political formation in Europe.

One might argue, in fact, that the character of Europe as a continent of

small, highly bounded, ethnically distinct and internally homogenous

nation states was a foundation of the European social model: welfare

solidarity was an expression of national solidarity and a means by which

national solidarity was built up. Its highly successful impact in that regard

is evident in the taken-for-granted character it now possesses in Europe(on these issues, see esp. Bartolini 2005 and Ferrera 2005).

European fragmentation its proliferation of small to medium-sized

nation states has been coming into question for European political elites

since the earliest days of the European movement in the 1950s. Europes

competitors since that time have been large, multi-ethnic continental scale

states in the 1950s, the United States and the Soviet Union, today with

rising powers like China, India and Brazil added to the mix. he Europeanproject is in part a peace process designed to ensure that European states

will never again assault each other as they did in the first half of the

twentieth century. But it is also a power process by which the larger states

in Europe now merely mid-sized states by global standards have

sought to come together, gather in their smaller neighbours and together

create a polity and an economy that will large and united enough to hold

its place in the world.

he long, slow and halting process of European integration has

encountered one of its many crises possibly its worst ever crisis in the

current phase of financial upheaval. he painfully built up single market

and the monetary union which seeks to further it are teetering on the

brink of collapse, with the financial problems of the Greek government

having provided a flashpoint (and with Irelands problems not far behind).

here is now a widely held view that the EU must now move either

forwards or backwards: it must integrate more that is, transfer further

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sovereignty from member states to the European level or slip back intofragmentation.

he welfare state is a core focus in debates on these issues. he retentionof national control over social policy has been a cardinal principle of

European integration. For European publics, the idea that welfareresponsibilities should cross national frontiers has been inconceivable(witness the recent fury among German voters at the idea that Germantaxes might be used to shore up Greek pensions). As we talk of the future

of the welfare state, we automatically think in national terms we talk ofdistribution within states, not between states. Real household incomes

among the Polish middle classes are only about half of what we in Irelandwould count as the poverty threshold. he Polish poor, not to speak ofthe poor in Romania and Bulgaria, are even further removed from whatwe would count as a basic living standard. So far, it has been possible for

us to talk of our welfare state without taking either German financing oreast European social need into account. But we are also now becomingaware that these factors could well loom larger in the future: a Europeanpolity with European powers of taxation and distribution might have to

become part of the context in which the next phase of evolution of welfarestates will take place.

Conclusion

he central message to be drawn from the reflections presented in thischapter is that current conditions leave the future of the welfare state

relatively open. Financial turmoil and economic slowdown are nowexerting a great deal of pressure on public social expenditures. here arealso long-term forces at work, such as population ageing, wideninginequalities in market incomes and sustained periods of relatively highunemployment, which pose difficulties for welfare states. However, the

balance between market and state which public social provision representsis shaped not only by problems on the state side. Of equal significance iswhat is happening in the market. Here of course what has to be noted

about the present crisis is that, echoing the experience of the 1930s, it is a




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crisis of the market rather than of the state, and the role of the state as

rescuer of last resort for market institutions is now evident in ways that it

has not been since the middle of the twentieth century. he global

economy has thus been catapulted into a new era of state activism, to adegree and in ways that were wholly unexpected as recently as 2007.

As far as welfare distribution is concerned, a further lesson of recent

decades is that state activism is not always progressive and protective of

the vulnerable but equally that it often is. Which of these routes the

state takes over the coming decades is a matter of politics in which the

weight of political forces is not yet set in any clear direction. It all is to play

for. As that play is worked out, there is a particular political challenge forEuropean welfare states in how they relate to each other. he European

social model has usually been defined as a distinctively European

commitment to social solidarity but it could equally be characterised by

the fragmentation of Europe into a multiplicity of states, each with its own

jealously guarded control over its welfare system. Whether that

fragmentation can continue into the future is one of the looming question

marks now emerging over the European tradition of highly bounded

national welfare states.

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References

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Bartolini, S. (2005) Restructuring Europe: Centre Formation, System

Building, and Political Structuring between the Nation State and the

European Union. Oxford: Oxford University Press

Brandolini, Andrea and Tim Smeeding, 2009. Income inequality in OECD

countries, in W. Salverda, B. Nolan and T. Smeeding (eds) The Oxford

Handbook of Economic Inequality. Oxford: Oxford University Press

Eichhorst, Werner and Anton Hemerijck. 2010. Welfare and employment:

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Fahey, Tony and Michelle Norris (2010) Housing, pp. 519-32 in Francis G

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Ferrera, Maurizio (2005) The Boundaries of Welfare: European Integration

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the development of welfare states in Western Europe, pp. 37-80 in Peter

Flora and Arnold J. Heidenheimer (eds.) The Development of Welfare

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Glennerster, Howard (2010) Te Sustainability of Western Welfare

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Handbook of the Welfare State. Oxford: Oxford University Press.




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Hills, John, John Ditch and Howard Glennerster. 1994.Beveridge and SocialSecurity. An international Retrospective. Oxford: Clarendon Press.

Korpi, Walter and Joachim Palme. 2003. New politics and class politics in the

context of austerity and globalization: Welfare state regress in 18countries, 19751995.American Political Science Review, 97 (3): 42546Levy, Jonah H. 2010. Welfare state rentrenchment, pp. 552-65 in Francis

G Castles, Stephan Leibfried, Jane Lewis, Herbert Obinger andChristopher Pierson (eds.) Oxford Handbook of the Welfare State.Oxford: Oxford University Press.

Lindert, Peter H. 2004. Growing Public. Social Spending and EconomicGrowth Since the Eighteenth Century, 2 vols. Cambridge: CambridgeUniversity Press.

McCashin, Anthony. 2004. Social Security in Ireland. Dublin: Gill andMacmillan.

Nolan, Brian and Iwe Marx (2009) Economic Inequality, Poverty andSocial Exclusion, pp. 315-341 in W. Salverda, B. Nolan and T. Smeeding(eds) The Oxford Handbook of Economic Inequality. Oxford: OxfordUniversity Press.

Obinger, Herbert and Uwe Wagschal. 2010. Social expenditures andrevenues, pp. 333-352 in Francis G Castles, Stephan Leibfried, JaneLewis, Herbert Obinger and Christopher Pierson (eds.) OxfordHandbook of the Welfare State. Oxford: Oxford University Press.

OECD 2010.Pension Markets in Focus July, Issue 7.Pierson, Paul. 1994.Dismantling the Welfare State? Reagan, Thatcher, and

the Politics of Retrenchment. Cambridge: Cambridge University Press.Starke, Peter. 2008.Radical Welfare State Retrenchment: A Comparative

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World Bank Independent Evaluation Group, 2006.Pension Reform: How toStrengthen World Bank Assistance. Washington,DC: WorldBank.Available at

http://lnweb90.worldbank.org/OED/OEDDocLib.nsf/OEDSearch?OpenForm

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2The Welfare State across Selected OECD Countries:

How much does it really cost and how goodis it in reducing poverty?

Willem Adema1

his chapter argues that the conventional measures of public spending

are incomplete measures of welfare state effort. hey can be improvedupon by accounting for private social spending and the effects that taxsystems have on social expenditure: direct taxation of benefit income;indirect taxation of consumption by benefit-recipients; and the award taxbreaks with a social purpose. here are significant differences in the extentto which private spending and tax systems affect levels of social support,so accounting for these issues is crucial to international comparisons of thewelfare state.

Public and private social expenditure programmes may also have differentredistributive effects. However, cross-national differences in redistributionare not just related to individual programme design, but also to the overalllevel of social spending, and the nature of tax systems. Net spendingindicators may give a better idea of true levels of social spending they donot cover employer social security contributions and private pensioncontributions which limit their use for assessing re-distribution in

tax/benefit systems. In particular, research on the redistributive nature ofemployer social security contributions would be a most welcome additionto the expanding areas of social welfare research.

1 Willem Adema is a senior economist in the OECD Social Policy Division. He isindebted to Pauline Fron and Maxime Ladaique for statistical support, and he thanksDominic Richardson for helpful comments. he views expressed in this papercannot be attributed to the OECD or its Member governments; they are the

responsibility of the author alone.



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Outline of chapter

1. Introduction2. Setting the scene: what is the social domain?

2.1 Social purposes

2.2 Compulsion and/or inter-personal redistribution.2.3 Public, private social and exclusively private expenditure3. he size of the welfare state: indicators on social spending

3.1 Public social spending before taxation3.2 Private social expenditure3.3 he tax system and social spending3.3.1. Clawing back benefit income through direct and indirect taxation

3.3.2. Providing social support through the tax system3.3.3. From gross public to net total social expenditure

4 Re-distribution of income.4.1. Social expenditure indicators and poverty

4.2 axes and public cash transfers5. Conclusions

Bilbiography

Tables

able 1: Categorisation of benefits with a social purpose

able 2: From gross public to net total social spending, 2007able 3: Denmark, Ireland and Sweden are successful in transferring public

social spending to low-income groups

Boxes

Box 1. Austerity measures and family and child policies: an initial overview

Charts

Chart 1: Social expenditure has increased significantly since 1980

Chart 2: In terms of spending are pensions and health the most important socialpolicy areas

Chart 3: Private social expenditure largely concerns pensions across the OECD,but not in the France, Germany or the US

Chart 4: Benefit income in Denmark and Sweden is taxed heavilyChart 5: ax breaks with a social purpose are most important in France,

Germany and the USChart 6: Poverty and different indicators of social expenditure

Chart 6: Poverty and different indicators of social expenditure (continued)

Willem Adema



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1. Introduction

1. he welfare state is once again in the spotlight. In the aftermath of

the financial crisis that unfolded in 2008/9 public budgets are beingreconsidered with an eye on potential savings. Since public welfare

spending constitute almost half of general government spending, itis not surprising that social spending programmes are being re-assessed.

2. But what is social welfare? Is it largely public provided or does theprivate sector play a role? How is it measured, what is included and

what not? Most analyses on the size of the welfare state are based onsocial expenditure data as on public budgets, and relating thisspending aggregate to gross domestic product (GDP) then gives acomparison of the size of welfare states across countries. Such an

analysis has many advantages, not least that it allows for a detailedexamination of different social spending programmes. But it has itsshortcomings: it ignores the effect of tax systems as well as private

social spending.

3. Tax systems can significantly affect the degree to which expenditurebudgets reflect true public social effort. In particular, account shouldbe taken of: direct taxation of benefit income; indirect taxation ofconsumption out of benefit income; fiscal supports to households that

are similar to cash benefits; and, tax breaks to encourage individualsand/or commercial and non-commercial entities to provide socialsupport (e.g. through favourable tax treatment of private pension

contributions or tax breaks to charities). Accounting for these effectsof the tax system on budgetary allocations with a social purpose leadsto indicators of net, after tax, public social expenditure.

4. Furthermore, public authorities are also instrumental in generating

delivery of social benefits by the private sector. Most directly,governments can mandate individuals to take up certain types ofinsurance, or employers to provide pension coverage or continued

(partial) wage payment in case of sickness. Governments can also

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stimulate private provision of benefits or take-up of insurancethrough favourable fiscal treatment of such arrangements. In all,

through regulation and fiscal stimulation governments affect

redistribution within private sector arrangements, therebyenhancing their social nature.

5. Inevitably, the analysis of social expenditure starts with outliningmethodological concepts. his section is kept short, and maytherefore appear somewhat dense: for more detail the interested

reader is referred to Adema and Ladaique (2009). On the basis ofnew and preliminary data in the OECD Social Expenditure database

(SOCX), the paper then provides new data on gross public andprivate social expenditure, and indicators on the effect of the taxsystem on social expenditure (OECD, 2010a). he different publicand private spending measures, as adjusted for the effect of taxation

on social spending are then considered in view of poverty outcomes,and the paper concludes with considering the overall effect of taxand cash transfers on the redistributive nature of welfare systems.

2. Setting the scene: what is the social domain?

6. he OECD defines social expenditures as:he provision by public and private institutions of benefits to, andfinancial contributions targeted at, households and individuals in

order to provide support during circumstances which adverselyaffect their welfare, provided that the provision of the benefits and

financial contributions constitutes neither a direct payment for aparticular good or service nor an individual contract or transfer.

7. Since only benefits provided by institutions are included in thesocial expenditure definition, transfers between households

albeit of a social nature, are not in the social domain (Adema, andLadaique, 2009).

8. here are two main criteria which have to be simultaneously satisfied

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for an expenditure item to be classified as social in SOCX. First, thebenefits have to be intended to address one or more social purposes.

Second, programmes regulating the provision of benefits have to

involve either a) inter-personal redistribution, or b) compulsoryparticipation

2.1 Social purposes

9. Expenditures with a social purpose towards circumstances thatadversely affect welfare include: Old-age benefits pensions and

home-help and residential services for the elderly; Survivor benefits pensions and funeral payments; Incapacity-related benefits disability benefits and services, employee sickness payments;Health

expenditure spending on in- and out-patient care, medical goods,and prevention; Family benefits3 child allowances and credits,supports for early childhood care and education4, income support

during leave, sole-parent benefits;Active Labour Market Policies employment services, training, youth measures, subsidised

employment, employment measures for the disabled;Unemployment benefits unemployment compensation, earlyretirement for labour market reasons;Housing5 housing allowances

3 SOCX does not include public supports for married couples, as there is nointernational consensus on whether marriage support is a social policy objective ornot. Such support can be substantial, and in some countries married couples are

viewed as the appropriate unit for taxation (OECD, 2006).4 o improve comparisons of public spending on early childhood and education

supports, indicators have been adjusted for cross-national differences in thecompulsory age of entry into primary school (which vary from age 5 to 7 across theOECD). Expenditures concerns formal supports for children age 0 to and including5 years of age (OECD, 2010b, OECD Family database).

5 Rent subsidies are considered social, as is residential support for the elderly, disabledand other population groups (as recorded under Old-age, Incapacity-relatedbenefits, etc.). Mortgage relief for low-income households has some similarities withsuch programmes. However, it is unclear up to what level of income, or what levelof property value, such support should be considered social. Relevant thresholdsdiffer across countries, and, in any case, cross-nationally comparable data is notavailable. herefore, mortgage relief and capital subsidies towards construction of

housing are not considered here.




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and rent subsidies; and, Other contingencies, other support measures,including non-categorical cash benefits to low-income households,legal aid, supports towards substance abuse, etc.

10. he detailed recording of spending data in SOCX allow for athorough assessment of quality whilst limiting the risk of doublecounting. here remain some gaps in data quality, particularly inareas which are the remit of local government. For example,expenditure data on early childhood care and education services orsocial assistance benefits in federal countries as Canada andSwitzerland are deemed of lesser quality than in most OECD

countries.

11. SOCX includes data on the magnitude of private social spendingacross the OECD, but this data is nevertheless deemed of lesserquality than information on budgetary allocations for social support.

2.2 Compulsion and/or inter-personal redistribution.

12. Expenditure programmes are considered social if participation iscompulsory6 and/or if they involve inter-personal redistribution ofresources among programme participants; in other words, ifentitlements are not the result of direct market transactions byindividuals given their individual risk profiles. The provision of socialservices (by public authorities and/or non-government organisations)and social insurance and social assistance programmes practicallyalways involves redistribution across households. Such programmesare either financed through general taxation or social securitycontributions, which lead to the redistribution of resources acrossthe population or within population groups (e.g. all members of anunemployment insurance fund).

6 In theory, it is possible that public and private pension programmes do not involveredistribution of resources across households, but only over time. However, ifparticipation is compulsory that reflects a policy judgement that coverage of these

plans is desirable, and hence, these programmes are considered social.

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13. Inter-personal redistribution in private programmes is oftenintroduced by government regulation or fiscal intervention.Governments may force individuals and/or employers to take up

protection provisions regardless of their risk-profiles or theprevailing market prices. For example, through risk-sharing (e.g.through forcing insurance companies to have one price for bothsick and healthy people) public policy can subsidise sick people,and thus ensure redistribution between households. Public fiscalintervention to stimulate private take-up on a collective orindividual basis also means that the take-up decision is not fullydetermined by the individual risk-profile or prevalent market prices(the same holds for social benefits derived from collectiveagreements or taken out by employers on a collective basis). hereis a high degree of similarity between legally-stipulated privatearrangements and tax-advantaged plans.

2.3 Public, private social and exclusively private expenditure

14. he distinction between public and private social protection is madeon the basis of whoever controls the relevant financial flows; publicinstitutions or private bodies. Public social spending concernsprogrammes whose financing is controlled by different levels ofgovernment and social security funds, as income support payments.All social benefits not provided by general government areconsidered private.

15. Private social benefits can be categorized in two broad groups. First,

there are mandatory private social benefits, including legallystipulated employment-related incapacity-related cash transfers,such as sickness, disability and occupational injury benefits and,pensions derived from mandatory contributions. Second, there is arange of voluntary private social expenditure items, including: socialservices provided by NGOs, employer-provided income supportduring child-related leave or sickness, and pensions derived fromemployer contributions or fiscally advantaged individual

contributions (as in the National Accounts, SOCX records pensions




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paid to former civil servants through autonomous funds as a privatespending item, e.g. Denmark, Sweden and the United Kingdom).

16. Take-up of individual insurance, even with a social purpose, is a matterfor the persons concerned, and premiums are based on the individualpreferences and the individual risk profile. For example, if someonetakes out private pension insurance which is actuarially fair, then thereis no ex ante redistribution across households. The insurancecompany sets the price so that the individual can expect to receiveback in compensation payments exactly what it costs him or her. Such

spending is not considered social, but exclusively private. Table 1

summarizes which expenditures are social and which are not.

Table 1: Categorisation of benefits with a social purpose 1, 2

Public Private

Mandatory Voluntary Mandatory Voluntary

Means-tested Voluntary Employer- Tax-advantagedbenefits, participation provided sickness benefits, e.g.social in public benefits, benefits individual

insurance insurance accruing from retirementbenefits programmes. mandatory accounts,

Self-employed contributions to, occupationalopting in to for example, pensions,obtain insurance pension or employer-providedcoverage. disability health plans

insurance.

Benefits from Non tax- Exclusively private:

government advantaged Benefits accruingmanaged actuarially fair from insuranceindividual pension benefits plans bought atsaving market pricesschemes given individual

preferences.

(1) By definition transfers between individuals, also when of a social nature, are not

considered to be within the social domain.

(2) he shaded cells reflect benefits that are NO classified as social.

Willem Adema


Re

distribution

Nore

distribution


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3. The size of the welfare state: indicators on social

spending

3.1 Public social spending before taxation

17. Since 1980, gross public social expenditure has increased from about

16.0% to 20.6% of GDP in 2003/4 before falling back to 20% on

average across the 30 OECD countries (Chart 1). Experiences differ

across OECD countries, but on average, public social spending-to-

GDP ratios increased most significantly in the early 1980s, early

1990s and, again in the beginning of this millennium, when the

average public spending-to-GDP increased by almost 1.5% of GDP

from 2000 to 2003. Except for Denmark, Ireland, and Sweden,

spending-to-GDP ratios were considerably higher in 2007 than they

were in 1980 in most selected countries7. During the 1980s social

spending-to-GDP ratios in Ireland reached 20%, but with sustained

GDP-growth outpacing spending increments, spending-to-GDP

ratios have oscillated around 15 percentage points until 2008. In

2008/9, the contraction in GDP and the increase in unemployment

and social assistance spending will have led to a marked increase of

social spending-to-GDP ratios in most OECD countries (Box 1).

18. On average across the OECD, spending on cash benefits (11.3% of

GDP) is 3 percentage points higher than spending on health and social

services (Chart 2). Public pension transfers to the retired population

and survivors at 7.2% of GDP and public spending on health care

services at 6.1% of GDP are the largest spending items. By comparison,7 At the time of writing, work on updating OECD gross and net social expenditure

indicators was ongoing. he data concern 2007, as estimates on taxation of benefitsincome become available two to three years after the relevant year. Because of thisas well as presentation reasons, in parts of the paper the analysis has been restrictedto a limited group of OECD countries, broadly representing the different groupingsof welfare systems and the geographical spread of OECD countries. he selectedcountries included Ireland, the larger European countries, France, Germany, Italyand the United Kingdom, two Nordic countries (Denmark and Sweden) as well as

Japan and the United States.




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public spending on income transfers to the working-age population is

on average considerably lower across the OECD at just over 4.1% of

GDP in 2007, while spending on social service other than health is

around 2.2% of GDP. Only Nordic countries spend considerable more,because of the comprehensive system of early childhood care and

education supports as well as services for the elderly.

19. Cross-national variation in social spending is considerable, in

particular for public pension expenditure. Public pension spending

is highest in France, Germany and Italy and much lower in the US,

Denmark, the UK and Ireland. he reasons for this are many and

include: the relative importance of in-kind benefit provision to theelderly (Denmark); low gross mandatory pension benefit

replacement rates in Ireland, the UK and the US (OECD, 2009a); the

US and particularly Ireland have old-age dependency rates well

below the OECD average (OECD, 2009b); and, the relative

importance of private pensions (see below).

3.2 Private social expenditure

20. In terms of benefits paid and services delivered private pension

payments are the largest private social expenditure item across the

OECD area at almost 2% of GDP. Health services covered by private

health insurers amount to almost 5.5% of GDP and 1.5% of GDP in

France. Employer-provided sick-pay is most important in Germany

and Sweden. Social services by NGOs are important, but these

organisations are not obliged to report to central agencies. Hence,there is no comprehensive dataset on the magnitude of social

benefits provided by NGOs.

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Box 1. Austerity measures and family andchild policies: an initial overview

Over the years, the unfolding ageing of populations has led to pension

reform in many OECD countries. Frequently, such reform involvedincreasing retirement ages, as part of a more general drive to put pensionsystems on a more financially sustainable footing (OECD, 2009a).

The financial crisis which started to unfold in 2008 has put welfareprogrammes under more pressure, although initially many Europeangovernments increased the generosity (in terms of eligibility criteria,and/or duration, and/or supplementary payments) of income supportsfor unemployed low-income families (Richardson, 2010).

In the area of family policy (including child allowances, fiscal supports forfamilies, income support during leave, and family services including earlychildhood care and education supports), many European governmentsare planning austerity measures. Austerity packages have been approvedor are under approval in Denmark, Germany, Greece, Ireland, Italy,Portugal, Spain and the United Kingdom. Austerity packages have beenannounced in Estonia, France, Hungary, Luxembourg, and Slovenia.Discussions are ongoing following elections in Belgium, the CzechRepublic, Finland, the Netherlands, the Slovak Republic and Sweden.There are no austerity measures in the family policy area in Poland andAustria; indeed, in Austria family supports were increased in response tothe unfolding crisis.

Family policy supports in both Korea and notably Japan are beingextended with the aim to support families to have more children (OECD,2007). In the US the Recovery Act included special measures extendingfamily policies to the working poor including in-work benefits and theEarned Income Tax Credit. Australia plans to roll out paid parental leave

supports in 2011. Following elections in New Zealand plans to extend freeearly childhood care and education services to 2-year olds have beenshelved, and reform to limit unconditional income support for sole parentsto when children are in primary school is being considered.

Thus far, most of the measures are of a temporary nature, the few benefitsthat have been scrapped altogether include the first child tax break inEstonia, and the baby / maternity / trust fund / health grants in Spain andthe UK. Up to now, there has been no reform which added an income or

means-test to universal benefits (Richardson, 2010).



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Chart 1: Social expenditure has increased significantly since 1980

Public social expenditure-to-GDP ratio, 1980-2007, preliminary data

Source: OECD (2010a), OECD Social Expenditure database.

0

5

10

15

20

25

30

35

0

5

10

15

20

25

30

35

1980 1985 1990 1995 2000 2007

Sweden Japan

United Kingdom United StatesOECD-30

0

5

10

15

20

25

30

35

0

5

10

15

20

25

30

35

1980 1985 1990 1995 2000 2007

Denmark France Germany

Italy Ireland OECD-30



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Chart 2: In terms of spending are pensions and health the most

important social policy areas?

Public social expenditure by broad social policy area, in percentage of GDP

in 2007, preliminary data

Countries are ranked by decreasing order of public social expenditure as a percentage ofGDP. Spending on Active Labour Market Programs (ALMPs) cannot be split bycash/services breakdown; they are however included in the total public spending-to-GDP ratios shown in brackets.

Source: OECD (2010a), OECD Social Expenditure database, preliminary data.



France(28.3)

Sweden(28)

Denmark(26.1)

Germany(25.1)

Italy(25)

UnitedKingdom(20.6)

OECD-30(20.1)

Japan

(19.6)

Ireland(16.2)

UnitedStates(15.8)

Cash

benefits

Services

7,5

6,7

6,5

7,9

6,7

6,9

6,1

6,3

5,8

7,0

2,9

6,8

5,7

1,9

1,0

3,3

2,2

1,8

1,0

0,9

0

2

4

6

8

10

12

14

16

18

20

Health

Allsocialservices

excepthealth

12,5

7,3

5,6

10,7

14,1

5,4

7,2

9,7

3,6

5,9

4,6

5,77

,0

4,0

2,8

4,6

4,1

1,6

5,3

1,9

0

2

4

6

8

10

12

14

16

18

20

Pensions(oldageand

survivors)

Incomesupporttothe

workingagepopulation


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Chart 3: Private social expenditure largely concerns pensions across

the OECD, but not in France, Germany or the US

Private social expenditure by broad social policy area, in percentage ofGDP in 2007, preliminary data


21. Already in the mid-1990s, the value of spending on private pensionbenefits in Ireland amounted to around 1% of GDP (Hughes andWhelan, 1995). Available data indicate that the spending-to-GDPratio had not increased much until 2007. his suggests that spendingon tax expenditures on pensions (See able 2 below and Hughes,2008) is about as high as spending on current private pensionpayments.

3.3 The tax system and social spending

22. axation, including social security contributions, is used to financesocial support (OECD, 2009c), and the manner in which this is doneinfluences the redistributive effects of tax/benefit systems (OECD,2008). ax systems also affect levels of social expenditure, and

broadly speaking they do so through direct and indirect taxation of

Other

Incapacity

Health

Old age and survivors

12

10

8

6

4

2

0

-2

USA

UK

JPN

SWE

FRA

OECD

GER

DNK

ITA

IRE

Willem Adema



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benefit income, and the provision of social supports through the tax

system, so-called tax breaks with a social purpose.

23. here is a range of methodological and measurement issues involvedin the estimation of the effects of tax systems on social expenditure.

his discussion is not presented here, but can be found in Adema

and Ladaique (2009). For our purposes here, it suffices to say that

generally, the quality of estimates on the size of taxation of benefit

income and tax breaks with a social purpose is considered lower than

the quality of information on public social expenditure.

3.3.1. Clawing back benefit income through direct and indirect taxation

24. ax systems are also used to claw back social support in two ways.

First, through direct taxation of benefit income, Governments levying

income tax and social security contributions on cash transfers to

beneficiaries. Second, benefit income is provided to finance

consumption of goods and services by recipients and consumption

is subject to indirect taxation.

25. he extent to which benefit income is taxed varies hugely across

countries, and thus affects international comparisons of social

support. For example, in Sweden a sole parent with two children on

unemployment benefit who previously was on average earnings, pays

about 20% of his/ her income to the government through income

taxation and social security contributions, whereas unemploymentbenefit income in Germany and Japan is not subject to taxation

(OECD, 2010c). his means that in net terms, i.e. after tax,

differences in aggregate spending on unemployment benefits

between Sweden and Germany and Japan are not as large as

suggested by gross spending indicators. Apart from variation across

countries, different benefits are also taxed differently. Child benefits,

social assistance and housing support are generally not taxed across

the OECD; pensions and income support payments during periods




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of child-related leave, sickness and invalidity are often part of taxableincome.

26. axation of consumption using benefit income is lowest in non-European OECD countries, since indirect tax rates are lower. Ademaand Ladaique (2009) estimated that in 2005, on average indirect taxrates on consumption in Japan (6.6%) and the US (4.3%) were verylow compared to Sweden (20.5%), Ireland (21%) and Denmark(25.9%). Consequently, in non-European countries with limitedindirect taxation, gross spending levels can also be relatively low togenerate the same net income level for benefit recipients in Europeancountries.

27. At just below 5% of GDP at factor cost in 2007, direct taxation ofbenefit income (including private transfers) is particularly high inlarge welfare states such as Denmark and Sweden, three times ashigh as the OECD average at 1.7% (Chart 4). Direct tax on publicbenefit income is 0.5% of GDP or less in Japan and Ireland. Indirecttaxation of consumption out of benefit income is around 3 to 3.5%of GDP in Denmark, France and Sweden, and about 2.5% of GDP inthe other selected European countries. In Japan and the US itamounted to 1 percentage point of GDP or less.

28. aken together, through direct and indirect taxation of benefitincome Danish and Swedish Exchequers claw back about 8percentage points of GDPfc, while this is about 3 to 5 percentagepoints of GDPfc in other European countries, and less than 2% of

GDPfc in Japan and the US.

Willem Adema



43/136

Chart 4: Benefit income in Denmark and Sweden is taxed heavily

Direct and Indirect tax of benefit income, percentage of GDP at factorcosts, 2007, preliminary data

Data for the United States refer to 2005. Data for indirect taxes refer to 2005

GDP at market prices is the most frequently used indicator on the size of an economy.

However, net social spending indicators are better related to GDP at factor cost, because

both Net spending indicators and GDPfc are adjusted for the value of indirect taxation.


3.3.2. Providing social support through the tax system

29. he tax system can be used to directly provide social support toclients, and this delivery channel is often used to support familieswith children, most notably in France, Germany and the UnitedStates (Chart 5). In Germany in 2007 tax relief for children amounted

to EUR 36.6 billion of which EUR 20.9 was off-set against taxliabilities and EUR 15.7 billion paid out in transfer income. Similarly,in 2005, the cost of the Earned Income ax Credit in the USamounted to USD 43.2 billion, of which USD 5.0 billion off-setting

tax liabilities of clients and USD 38.2 billion in cash payments. Inmany OECD countries, support for families with children is alsoembedded in the tax unit. In France, fiscal support towards childrenthrough a variety of fiscal measures (including the Quotient

Familial) amounted to EUR 13.6 billion in 2007. In all, the role of the

0

1

2

3

4

5

6

7

8

9

Indirect taxes

Direct taxes

DKN

SWE

ITA

FRA

DEU

UK

IRL

USA

JPN

OECD




44/136

tax system in providing family support was most pronounced in

France, Germany and the United States with fiscal benefits towards

families amounting to around 1% of GDPfc.

Chart 5: Tax breaks with a social purpose are most important in

France, Germany and the US

ax breaks with a social purpose (excluding pensions), 2007, preliminary

data

Data for the United States refer to 2005. Data for indirect taxes refer to 2005


30. Governments also use the tax system to stimulate the take-up of

private protection insurance coverage by individuals and/oremployment-related plans. hese tax breaks can be categorised in

two broad groups. First, there are ax breaks towards currentprivate

social benefits, i.e. favourable tax treatment aimed at stimulating the

provision of private social benefits in the current year such as

voluntary private unemployment coverage or private health

insurance. his type of tax break is important in Germany (where

about 18% of the population is covered by private health insurance)

and, particularly in the US where the exclusion of employer

0,0

0,5

1,0

1,5

2,0

2,5

TBSPs towards current private benefits

TBSPs similar to cash benefits

USA

DEU

FRA

JPN

UK

IRL

ITA

DNK

SWE

OECD

%G

DPatfactorcost

Willem Adema



45/136

contributions for medical insurance premiums and medical care

amounted to about 1.0% of GDP (Chart 5).

31. Second, there are tax breaks towards pensions. hese are important,but there is, as yet, no comparable data set available on the value of

tax breaks for pensions. Favourable tax treatment of pensions can

be in three different forms: tax exemptions for contributions to

private pensions; tax relief for investment income of capitalised

pension funds; and tax relief for pension benefits. hese three forms

of support should be netted out against each other according to a

common methodology to facilitate international comparison.

However, at present such a data set does not exist. Consequently, theinformation which is available has been included in able 2 (below)

as a memorandum item. Nevertheless, it is clear that fiscal supports

for private pensions are important in Germany, Japan, the United

States and Ireland.

3.3.3. From gross public to net total social expenditure

32. Considering gross public spending indicators and information on

the effects of the tax system on social spending gives an indicator of

net current public social expenditure. his indicator gives an

impression of the real magnitude of budgetary efforts in the social

field. Also considering information on private social spending and

taxation of such benefit income identifies that proportion of an

economys domestic production to w

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